Priorities 2010 Conference 24 th April 2010, Boston.

1. An Investigation into the Impact of Irreversibility on HIV/AIDS Prioritization in the Context of the Global Economic Crisis:A Case Study of Malawi Priorities 2010 Conference 24th April 2010, Boston. Paul Revill, Steve Thomas Centre for Global Health, Trinity College Dublin.

2. Overview • Scope of research • The financing picture for HIV/AIDS programmes in the context of the Global Economic Crisis • Conventional tools for prioritization and the problem of irreversibility • The prioritization of HIV/AIDS programs given shortfalls in funding • Further considerations • Conclusion

3. Notes: • What this research does: • It introduces a problem in current approaches to prioritization particularly significant in the prevailing economic environment • It begins to examine how this problem can be characterized and overcome, and whether approaches can be developed for pragmatic policy-making. • What this research doesn’t do: • It does not offer an empirical solution to the issues highlighted in the paper • It doesn’t prescribe to HIV/AIDS policy-makers which programmes should be prioritized Perhaps the greatest value is in identifying areas in which future research will add value.

4. The Financing Picture for HIV/AIDS Programmes in the Global Economic Crisis • Global investments in HIV/AIDS have increased from have increased from $7.9bn in 2005 to $13.7bn in 2008. • Future patterns of the epidemic and treatment needs are predictable, but future funding in highly unpredictable – particularly due to the global economic crisis (Ahmed, 2009) • The Crisis puts HIV/AIDS programmes in LDCs at risk through possible reductions in • Domestic sourced revenues • ODA

5. History Says.... Source: Roodman (2008)

7. The Conventional Tools for Programme Prioritization • The conventional set of tools for the prioritization of programs given limited resources is cost-effectiveness analysis. • The decision to fund analternative (j) is then based on expected costs (Cj),expected outcomes (Qj) and the budget threshold (λ). The cost-effectiveness of j can be expressed in terms of net benefit: • For an intervention offering positive health gains at a cost it’s estimated cost-effectiveness rises and falls in the threshold λ.

8. The Conventional Tools for Programme Prioritization (2) • CEA offers a robust set of tools that are used internationally for healthcare prioritization • However, it relies upon some fairly strong implicit assumptions: • The decision has to be made ‘today’ – there is no option to defer • The DM can costlessly switch between technologies • There are no sunk costs or irreversibilities • These assumptions may not represent a problem in stable environments. However, in situations of high future uncertainty and irreversibility in decision-making they can lead to highly misleading results.

9. The Problem of Irreversibility • If an investment decision is subject to some form of irreversibility this limits the scope and possibly value of future choices. • In the presence of irreversibility and uncertainty, decision-makers have reason to value the flexibility • The technical toolkit best suited to incorporate irreversibility into investment decision-making is real options valuation (ROV) • There are 2 broad types of options that that can be equated with the kinds of options found in financial markets • The “call option” value: wait and see before committing to an ex-ante decision • The “put” or “abandonment option” value: relates to disinvestment decisions over existing interventions

10. Responding to Interruptions in Funding • How, then, can policy-makers respond to a reduction in financial resources • Aim to deliver the same services at reduced costs – seek technical efficiency gains; • Identify those interventions that are highly CE and highly irreversible (the “untouchables”) – ensure the are provided; • Identify those interventions that have low CE and/or are highly reversible – the contenders for cost-savings. • Given evidence of similar CE, examining differential levels of irreversibility across programmes offers a feasible short-cut to a more complex decision problem.

11. The Irreversibility of HIV/AIDS Programmes in Malawi • The following causes of irreversibility were identified • Sunk costs - HR costs • Health consequences - Stakeholder reactions • Institution and systems effects • Working with national HIV/AIDS policy-makers priorities were then examined based on CE and Irreversibility: • Some potential tech. efficiency savings • Highly reversible activities were identified: e.g. mainstreaming, information campaigns. • Other programmes if cut today would be more difficult/costly to restart in future: notably PMTCT, and treatment.

12. The Irreversibility of HIV/AIDS Programmes in Malawi (2) • CEA merits a predominant role in the prioritization of programs • In times of high future uncertainty standard CE are not sufficient • It’s also necessary to consider that value of future choices based on the irreversibility of today’s decisions • Programs vary widely in CE and their degree of irreversibility • Reductions of treatment programs would be very irreversible, so are particularly vulnerable to interruptions in funding • Undertaking this work showed that policy-makers found the approaches intuitive, they agreed with the criteria, and that it offered an improvement on existing ad hoc prioritization.

13. Further Challenges • Methods do not currently exist to incorporate ROV into the valuation of healthcare programmes within a fixed budget constrain • The next challenge is to develop appropriate methods and estimate empirically how ROV alters the ENBs of HIV/AIDS programmes • Consideration of irreversibility also has implications for political economy issues, such as the debate on additionality (van der Gaag et al, 200x; Murray et al, 2010). • We will proceed to examine the implications of irreversibility for appropriate funding modalities

15. Thank You!

18. L1 = 100 L2 = 100 …. 0.5 -I = -490 0.5 S1 = 0 …. t = 0 t = 1 t = 2 t > 2 The Value of Future Flexibility Fixed cost of investment (I) = -490 Probability of large funding stream (q) = 0.5 Probability of small funding stream (1-q) = 0.5 Discount rate (r) = 0.1 The Call Option Value: Following the “Bad News” Principle • If the decision has to be made today (t=0) the investment is undertaken with a positive NPVt=0 of 10. • If there is the possibility of delay the investment would not take place in the negative variant due to a NPVt=1|S of -490, but will in the positive variant with a NPVt=1|L of 510 • The value of the project evaluated today, inclusive of the option, then becomes • This exceeds the “now or never” decision by 231.8-10 = 221.8, which is the “call option” value of delay.

19. L1 = 50 L2 = 50 …. 0.5 COB = 0 0.5 S1 = -50 SC = 100 t = 0 t = 1 t = 2 t > 2 The Value of Future Flexibility (2) Current operating net benefit (COB) of 0 Scrap value (SV) of abandonment of 100 Probability of large funding stream (q) = 0.5 Probability of small funding stream (1-q) = 0.5 Discount rate (r) = 0.1 The Put Option Value: Following the “Good News” Principle • If the decision is delayed and the positive variant occurs, the investment valued at t=1 is 50/0.1 = 500. This exceeds the scrap value so the interventions is continued • If the decision is delayed and negative variant occurs the intervention will be withdrawn with a value in t=1 of -50 +100/1.1 = 40.91 • To guide the first period decision we need to know the EPVt=0 of a “now or never” decision and the net present value inclusive of the option to delay (EPVOV) • The “now or never” decision would simply be obtain the scrap value of 100/1.1 = 90 • If deferral is possible the project value is • The difference 245.87 – 90 = 155.87 is the put option value of deferral

20. The Prioritization of Programs Given Interruptions in Funding 2 • We found that policymakers easily understood the concepts around CE and the value of future flexibility; they agreed with them as a criteria; and they could put them into practice. • Potential areas for technical efficiency gains included: • task-shifting; reductions in admin costs across the board; a reassessment of a “2% ORT” Directive • The low or questionable CE, highly reversible interventions included: • mainstreaming activities, some funding to CBOs, awareness campaigns, some research • The programs regarded as highly CE and/or highly irreversible (regarded as “the untouchables”) were: • targeted cash transfers, PMTCT, treatment/ART, surveillance surveys